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To Stop the Coffee Apocalypse, Starbucks Buys a Farm

Carlos Mario crouches next to a knee-high seedling growing in a plug of volcanic soil wrapped in black plastic. The young plant will one day be a coffee tree. A yellow sign identifies it as “Par 1 Plan 1,” the code name for a new coffee hybrid. The mermaid logo on Mario’s black cap identifies his employer.

Par 1 Plan 1 is one of 165,000 seedlings growing on a Costa Rican ridge 4,500 feet above sea level. The plants are arranged in long, neat rows within a 7.5-acre trapezoid crisscrossed with white irrigation pipe; there are scores of varieties, with names like Obata, Bourbon 2, and Et 47-P1. The patch is an open-air laboratory where Mario, a slight, 52-year-old agronomist with a salt-and-pepper mustache, tends to what he calls his “little babies.”

Caressing the leaves of Par 1 Plan 1, Mario says it’s a cross between a Costa Rican variety known for the bright flavor favored by U.S. coffee drinkers, and an African breed with a bitter taste but the resilience to battle a fungus ravaging Latin America’s coffee crop. After a year in the nursery, a few hundred of these seedlings will be replanted nearby. Seeds from the trees that can fend off disease and yield the most abundant, high-quality beans will be replanted again in a cycle that could take five years before Par 1 Plan 1 is ready for Costa Rican farmers. The plant Mario is holding might never be responsible for a Starbucks venti latte, but its grandchild or great-grandchild might. “We have hopes,” he says.

His nursery is part of Hacienda Alsacia, a 600-acre coffee farm in Costa Rica’s verdant Central Valley. Starbucks (SBUX) bought the operation last year to experiment with growing its own beans. When the company took over in May, the farm was in bad condition. Concrete patios where beans are spread to dry were pitted and scored. Tires on pickup trucks were bald. Thousands of trees afflicted with leaf and soil fungus had stopped producing the red and yellow cherries that contain coffee beans. This year, Hacienda Alsacia will produce less than half the ready-to-roast beans it has in its best seasons. Starbucks, which just posted its 19th straight quarter of profit growth, is losing money on the farm.

Chief Executive Officer Howard Schultz says his company has no interest in vertically integrating. Starbucks annually buys more than half a billion pounds of “green” (unroasted) beans—about 3 percent of the world’s supply—from more than 300,000 growers. On its own, Alsacia couldn’t keep Starbucks’s 20,000 stores going for even one day. Starbucks bought Alsacia because coffee is under siege.

Most of what’s sold in the U.S. by Starbucks, McDonald’s (MCD), Dunkin’ Donuts (DNKN), and other chains is a blend of arabica, one of the two species that dominate the $100 billion-plus world coffee market. Robusta, a cheaper species cultivated heavily in Indonesia and Vietnam, is easier to grow and less susceptible to disease but considered inferior for its harsher taste. It’s used mainly in instant coffees and supermarket brands.

A fungus known as roya, or rust, has helped reduce arabica production in Costa Rica, Guatemala, Honduras, El Salvador, and other Latin American nations over the past two harvests by as much as 35 percent, with further declines expected this year. Higher costs and falling world coffee prices have made survival tenuous for the multitude of small growers with 3- to 5-acre plots. Real estate prices pushed higher by urban sprawl are tempting some to forsake the bean and sell their land.

Complicating matters is climate change. The best arabica beans used by Starbucks and other upscale roasters thrive at elevations from 3,500 to 6,000 feet above sea level. Higher temperatures make these heights more livable for pests such as the coffee cherry borer and diseases like the leaf-killing rust, according to a report from the International Center for Tropical Agriculture in Colombia. The report predicts temperatures will keep climbing and rainfall will become more erratic, neither of which bodes well for arabica.

“Coffee is very sensitive,” says Ric Rhinehart, executive director of the Specialty Coffee Association of America. “It doesn’t have a lot of tolerance for big temperature swings, and it needs a very specific rainfall pattern.” Plant pathologist Jacques Avelino of the French organization Agricultural Research for Development (CIRAD) says climate change could shrink arabica-growing areas in Central America “to almost nothing in a few decades.” A research project at London’s Kew Royal Botanic Gardens lists arabica as “vulnerable” to extinction.

Dozens of other coffee species exist, but over the decades arabica and robusta have emerged as the ones roasters and drinkers prefer. Starbucks only buys arabica. Schultz acknowledges that the bean’s troubles are a threat to his business, though he says he’s optimistic about arabica’s chances. He says he’s more concerned about maintaining a diversified and financially healthy base of suppliers.

Photograph by Yann Gross for Bloomberg BusinessweekFreshly picked beans at Bella Vista farm near San José

Three-quarters of the world’s arabica is grown in Latin America. Some of Starbucks’s supply comes from Brazil, but it’s the specialized beans from Central America’s diverse microclimates that produce the blends for which Starbucks customers gladly pay $4 and more. Thanks to bumper crops out of Brazil and growing world stockpiles, arabica prices have plummeted to about $1.40 a pound from $3 in 2011. The average Costa Rican farmer—barred by law from planting robusta—is selling fewer arabica beans at lower prices while spending more than ever on fungicides to kill leaf rust. “Our relationships in Costa Rica go back 30 years,” Schultz says. “Believe it or not,” he adds, Starbucks will share what it learns about farming practices and new varieties, including new hybrid seeds, with farmers in Costa Rica and elsewhere. It will keep the best processed beans for itself to turn into the coffee blends it sells in stores; Starbucks recently filed for a U.S. trademark on “Hacienda Alsacia” for beverages, beans, and ground coffee. “What it’s not about is creating anything that’s proprietary.”

Any sharing would be welcome, says Xinia Chaves Quirós, Costa Rica’s deputy minister for agriculture and livestock. She offers a wry smile when asked what she thinks about Starbucks buying a coffee farm. “I thought it was a great idea,” she says, “because it was like, ‘Welcome to the real world of producing.’ ”

In the undulating fields of Hacienda Alsacia, pickers in grimy T-shirts and sweaty head rags pluck coffee cherries from the trees and drop them into plastic baskets and canvas bags. Flatbed trucks haul the cherries down curling gravel roads to the wet mill, a groaning, hissing contraption of tubs, troughs, hoses, and augers that strips the fruit of its skin, washes a slimy coating from the beans, and begins to separate the best.

A sweet aroma hangs in the air as Victor Trejos, the 46-year-old Costa Rican who manages the farm, fills a clear plastic cylinder with ripe cherries. He wants to know how many it will take to fill a liter. That will help him calculate how many cherries make up a fanega, a roughly 100-pound bag. Trejos is obsessed with the arithmetic of arabica. He used to work at Hacienda La Minita, a farm in Tarrazu, the Costa Rican region legendary for its rich, and richly priced, coffee beans.

One of the first things Trejos did after Starbucks hired him in June was assign a team of 15 workers to count each tree on the farm. He wanted to know how many healthy trees were in each of the 400 planted acres. For two weeks, using handheld counters, the workers trudged from 4,000 feet above sea level to 5,400 feet. They found many trees infected with rust or otherwise dying from neglect. “We have different plots where we can find only 3,000 to 4,000 coffee trees per hectare,” Trejos says. The rule of thumb in Costa Rica is 5,000 trees a hectare, with each tree producing at least 2,500 cherries per harvest. Otherwise, the farm’s overall yield will probably be too low to cover costs.

A black-and-white map of the farm delineating sections, elevations, and numbers of trees hangs in Trejos’s office. It helps him plan when and where to replant so Alsacia is gradually replenished without losing too much production in any given season. He recently replanted 30 acres with trees—some rust-resistant—that will begin bearing beans in two or three years. He’s also analyzing the chemistry of the soil and trying different fertilizers depending on location and elevation.

Washed beans are usually dried in two stages. First, they’re spread out on concrete slabs in the sun, then they’re brought indoors and put in rotating steel drums until they reach 11 percent moisture—no more, no less. Trejos keeps track of the drying progress on a whiteboard nearby. Throughout the process, the beans are rated for quality—by ripeness, size, weight, and color—that will help determine how much roasters will pay. Typically, around 70 percent of Alsacia’s product will meet Starbucks’s requirements.

It’s Trejos’s attention to detail that Starbucks says it wants to pass on to other growers. That won’t always be easy in a region where some farmers still use their teeth to determine when a bean is dry enough for roasting. “Small farmers aren’t thinking about long-term investment. They’re thinking, ‘I have to sell a lot of coffee this year,’ ” says Craig Russell, Starbucks’s executive vice president for global coffee. “A lot of times you ask farmers what fertilizer they used last year and they don’t remember what or how much.”

Hemileia vastatrix, better known as leaf rust, has periodically bedeviled coffee farms since the 1800s, when Ceylon, now known as Sri Lanka, switched from growing coffee to tea in the face of a rust invasion. The fungus appeared in Brazil in the 1970s, and its spores later migrated north on the wind. In recent years it’s caused serious trouble for Costa Rica and its neighbors. Many farms, even larger ones, were unprepared. Some didn’t believe the fungus could thrive at the highest coffee-growing elevations because it never had before. About three years ago, leaves pocked with yellow blotches—rust’s telltale sign—started showing up on trees unprotected by fungicide. The powdery spots rubbed off on the hands and clothes of pickers, who helped spread the disease further.

Photograph by Yann Gross for Bloomberg BusinessweekMario, Starbucks’s director of global agronomy, with one of 165,000 seedlings at Hacienda Alsacia

Almost every day, workers on the Bella Vista farm, 5 miles east of the capital, San José, put on goggles, face masks, and raincoats to spray rust-killing chemicals across the 620 acres. “We started last year and it never ends,” says Eric Andre, a lean, tanned 40-year-old who began driving a tractor on his family’s farm when he was 8. Rust has infected more than two-thirds of the trees at Bella Vista.

Squeezing through a thicket of 6-foot-high trees, Andre points to one heavy with plump red cherries. “See this?” he says, grinning. “The perfect coffee.” Two steps away, branches of a rust-riddled tree are bare or speckled with useless blackened cherries. Many trees will have to be pruned to the ground and won’t sprout beans again for three years. In accented English, Andre explains, “What is the worst is, we are fighting against one type of rust, then 15 days or one month later, there is another type.”

Starbucks has been buying the bulk of Bella Vista’s annual harvest since the 1990s. Andre’s getting $2.20 a pound from the company thanks to a contract he signed a while back, yet he’s still losing money: His costs have jumped from about $1.90 a pound to $2.60. At a Starbucks in San José’s ritzy Escazú suburb, half-pound bags of roasted beans from the region surrounding Andre’s farm sell for about $8. Standing beneath the three-story coffee mill his father bought in 1959, he says, “If coffee prices don’t go up, we are going to be in serious problems. We may even have to close.”

For a decade, Starbucks has persuaded Andre and other Costa Rican farmers to standardize their methods in efficient, sustainable ways under the company’s Coffee and Farmer Equity (C.A.F.E.) Practices program. In 2004, it built a center in Costa Rica devoted to coaching farmers and has since added similar centers in Rwanda, Tanzania, Colombia, and China. The company thinks being able to practice what it preaches on its own working farm should give it more credibility.

Starbucks must tread a fine line. Alsacia is much larger than 90 percent of Costa Rican farms, and most growers don’t have their own processing mills. With $14.9 billion in annual revenue, Starbucks could invest piles of cash in the farm. Agronomist Mario says that won’t happen. Doing things other growers couldn’t afford would defeat the purpose of Starbucks’s buying Alsacia: “If we just spent a lot of money, nobody else could do the same.”

Starbucks first considered buying a farm in Costa Rica about a decade ago. Over dinner at an Italian restaurant near San José, Russell’s predecessor as head of global coffee, Dub Hay, told Alsacia owner Alfredo Antonio Robert Polini that Starbucks might want to buy his plantation. “It had been my dream for a long time,” says Hay, who retired in 2012. “I couldn’t think of another farm we’d want to put Starbucks’s name on.”

Costa Rica was a logical choice. Starbucks had its farmer education center there, and the country offered relative safety and better infrastructure than other coffee-growing nations. “It’s one of the few places in the world that you can go to a coffee farm on a paved road,” Hay says. Hacienda Alsacia had its own mill and varying elevations that made it a perfect spot for experimentation. Starbucks resurfaced the drying patios, painted the mill, and added the nursery where Mario’s sprigs of Par 1 Plan 1 grow.

Mario drank his first cup of coffee at age 11. He grew up in the small town of Grecia, where he still lives and where two of his brothers grow coffee and sugar cane. With a bachelor’s degree in agronomy from the University of Costa Rica and a master’s in plant pathology from Ohio State University, he studied coffee diseases for Icafe, a nongovernmental organization that promotes the nation’s coffee industry. Starbucks hired him in 2004 to run global agronomy research at its support center in San José. Throughout his career, Mario has been interested in coffee’s biodiversity—or lack thereof. “It’s most important to have different varieties,” he says. The main objective of the Alsacia nursery is “to increase the genetic base for coffee.”

For all of the different Kenyan, Sumatran, Guatemalan, and other blends at your local Starbucks, arabica is a species with a narrow genetic makeup. The strains familiar to most coffee drinkers have been around only a few centuries, a relatively short span to mutate naturally and develop resistance to disease. “It’s a tiny little baby,” says Rhinehart of the specialty coffee association. “It has not had a chance to be successful, and there’s a chance for it to be unsuccessful. Some pathogen could take it out.” Few of the arabicas used in commercial coffee are equipped to fight rust, particularly as new versions of the fungus appear.

Although coffee is one of the world’s most valuable commodities, it’s essentially an orphan crop. No developed nation farms it in a significant way. Until recently, the squads of scientists toiling over corn and soybeans in multimillion-dollar laboratories had left it alone.

Thousands of undeveloped arabica strains grow wild in Ethiopia, widely considered the birthplace of coffee. “That’s where all the base genetic diversity exists,” says Tim Schilling, executive director of World Coffee Research, a nonprofit group of coffee companies, growers, and scientists affiliated with Texas A&M University. “But the government won’t let anyone in there to collect anything in those forests anymore. Now you can’t even take leaves out of Ethiopia. They are very protective of the intellectual property there, and rightfully so.” The Ethiopian Embassy in Washington did not respond to a request for comment.

Nestlé (NSRGY), among other companies, has been developing hardier varieties and has pledged to distribute 220 million plantlets to farmers by 2020. In a lab at Cornell University, World Coffee Research is now sequencing the DNA of about 1,000 Ethiopian strains collected during the 1950s and 1960s. The sequencing is designed to determine the most genetically diverse 20 to 30 arabica strains that can then be crossbred and propagated. The hope is to generate seeds that will resist not only rust but worms, bacteria, and other threats, while yielding abundant cherries that produce a delicious cup. Starbucks isn’t a member of World Coffee Research but will be testing 30 new arabica strains for the group in Mario’s nursery. Schilling says Mario “knows his stuff.”

Mario bounces happily between the 174 rows of seedlings in the nursery, where he’s testing more than 100 new strains of arabica. He points out a favorite, dubbed “Mario 2.” It’s an Ethiopian strain that resists rust and produces an appealing cup. But it tends to grow in erratic ways that make its yield unpredictable and, therefore, risky—especially for a small farm. “Some [trees] are taller, some have longer branches, some have different leaves,” Mario says. He hopes to remedy that by repeatedly propagating the plant, reusing the seeds of only the most consistent trees. Pointing to a row of similar-looking Mario 2 sprigs, he says, “You can see, it’s almost like a clone.”

Mario 2 may be ready for commercial use in three or four years. Starbucks can’t judge a new variety too hastily, Mario says, because a grower who devotes a swath of his farm to it can’t afford to learn years later that it’s not as hardy or delectable as once thought. Mario 2 and other strains also must be tested in other soils, elevations, and mixes of shade and sun.

Hacienda Alsacia won’t be producing its peak annual harvest of 700,000 pounds for another few years—if then. Starbucks’s Russell says that, depending on how things go, the company might consider buying another farm or two. It’s difficult to predict what will happen with rust, bugs, rainfall, temperatures, and the other increasingly fickle factors involved in growing coffee. “Making good coffee,” Russell says, “is hard.”